Amendments to IBC give home buyers primacy with banks

Home Buyers granted status of financial creditors, putting them at par with banks


In a welcome news for home buyers, the union cabinet, on May 23, 2018, has reportedly approved amendments to the Insolvency and Bankruptcy Code (IBC) 2016, allowing home buyers the status of financial creditors. This will grant them equal priority as banks and other institutional creditors, while recovering dues from stressed or insolvent realty firms.

Why is this important

  • Previously, if any realty firm went through bankruptcy, the home buyers were widely regarded as merely consumers and did not specifically fall under the liquidation claim waterfall, placing them at a disadvantageous position and exposing them to significant risk, upon investment in under-construction projects.
  • With recent amendments, buyers will get to participate in the resolution process and ensure that bidders for the bankrupt builder take care of their interests as well.
  • In case the builder goes into liquidation, buyers will come after secured creditors but before government dues in priority for the proceeds.

Stocks to be impacted

While the amendments bring a positive change for home buyers, the move could negatively impact lenders to real estate firms since their share in liquidation proceeds will get reduced thanks to a new set of claimants.

Hubtown (CMP: Rs. 66, MCap: Rs. 478 crs, FY2018 PE: -ve), DB Realty (CMP: Rs. 53, MCap: Rs. 1,289 crs, FY2017 PE: 883)

However, with increasing emphasis on timely execution, quality contractors like Capacite Infraprojects (CMP: Rs. 280, MCap: Rs. 1,900 crs, FY2020 PE:  13.94x) are expected to benefit due to higher demand.

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